Fed Injects Tens of Billions into Repo Mkt; Strong Bank Demand

The Federal Reserve continues to be busily injecting tens of billions of dollars of liquidity in the U.S financial system to calm markets, as it did the previous week, but banks were asking for more cash than the Fed was offering.

The Fed conducted a number of repo and two-week loan operations in response to a large request for cash by banks. The Fed said it would continue to do so daily through Oct. 10.

Tuesday the New York Fed offered $30 billion and received $62 billion in demand from banks offering collateral like Treasury and mortgage securities. It was the first time the Fed had offered multi-day loans after offering overnight loans. Later the Fed offered $75 billion in overnight loans and received demand of $80.2 billion.

Unsurprisingly, the NY Fed said Wednesday it would raise the size of scheduled operations after requests by banks for cash at offerings on Tuesday and Wednesday exceeded the amounts offered by the Fed.

Thursday the Fed jacked up the size of repo loans offered to $100 billion and $60 billion for the two-week offering. The latter offer was again oversubscribed. Banks asked for $72.75 billion in 14-day cash loans. On Friday, the NY Fed added $71.7 billion to the financial system through the repo markets, again to relieve funding pressure in money markets. Banks asked for $49 billion in 14-day loans and $22.7 billion overnight in a second separate operation, all accepted by the Fed.

The Fed began offering repo loans the previous week after a shortage of available cash in the financial system led repo rates to spike briefly as high as 10%, far above the Fed funds rate, as financial companies scrambled for overnight funding. Heavy bank demand is perhaps not surprising in light of the fact that they face end of quarter regulatory checks on liquidity regulations.

Separately, FOMC comments from various officials last week supports the notion that there will not be another reduction in the Fed funds rate on Oct. 30. This is supported by some data released last week. The personal-consumption-expenditures price index, data the Fed watches closely, rose a seasonally adjusted 0.03% last month from July, the Commerce Department said Friday, its smallest gain since January. Not much inflation there. However, a cut in December can’t be ruled out.

The U.S. Treasury 10-yr note yield ended Friday around 1.68% versus 1.72% the previous week. The CME Fed futures market, unsurprisingly, shows only about a 45% probability of another 25-bps rate cut at the next FOMC meeting, down from over 50% not long ago.

Upcoming: 10/30-31 - FOMC meeting.

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